DBS Discounts Multiroom Problem

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When it comes to stealing customers from cable,
direct-broadcast satellite operators are learning that it takes two.

It's no longer enough to offer discounts on just one
DBS receiver. To acquire the next wave of subscribers, DBS operators are working with
manufacturers and retailers to offer second receivers for as little as $99.

National retailers such as Circuit City and RadioShack have
already started promoting second Digital Satellite System receivers for $99 with the
purchase of a dual-LNB DSS unit. A dual-LNB unit is required to allow a single dish to
feed multiple receivers with different channels of programming.

EchoStar Communications Corp. was the first company to
address discounts for second receivers, with its Dish Network model 1000 IRD (integrated
receiver-decoder), which it introduced last summer. The company set a suggested retail
price of $129 for the "slave unit," but that cost will likely drop to match the
DSS promotions.

Although the costs of hardware continue to drop due to
improvements in chip technology and economies of scale, the wholesale costs of the
hardware have not yet fallen to match the retail prices of today's entry-level DBS
models. DBS operators are subsidizing the costs of first and second IRDs to help drive
subscriber rates, especially into cable-penetrated markets.

Hardware discounts are not new to DBS. EchoStar was the
first to drive the price of a first IRD down to $199 in mid-1996. At the time, the price
was tied to the purchase of an annual programming package, which is no longer required.
Discounts on second IRDs probably cost DBS operators even more because they can't
count on incremental programming revenues to make up the costs of subsidizing the
additional boxes.

DBS operators offer the subsidies on second IRDs as a way
to attract first-time subscribers that would otherwise turn away from DBS because of the
cost of entry. After the lack of local channels, the cost of additional receivers is cited
as the second-most-common objection to switching to DBS from cable.

"If the cost of multiple IRDs is an objection for a
sale, you have to overcome that objection," said Steve Blum, president of
California-based Tellus Venture Associates. "You're dealing with a group of
consumers who require a higher subsidy for acquisition."

Bill Casamo, executive vice president for DirecTv Inc.,
said the cost of a second receiver has always been a barrier to entry for some first-time
subscribers.

"As we go more into cabled markets, that becomes more
of a factor," he added, because cable customers are accustomed to seeing cable in
multiple rooms of the house.

With discounts on additional IRDs, "the obstacle
doesn't go away, but clearly, it's easier to overcome," said Jim Spreitzer,
telecommunications sales director for EchoStar's Dish Network.

The barrier-to-entry factor has not been lost on cable.
Operators across the country have told their customers to consider the cost of additional
DBS hardware before they make the switch.

Jones Intercable Inc., based in Englewood, Colo., has been
"very aggressive" against DBS in its advertising for the past two years, said
Cindy Winning, the MSO's group vice president of marketing. Jones' ad campaign
focuses on the differences between cable and DBS. One of those differences is the
inability to watch different channels in different rooms without spending more on
hardware.

"Where these ads were run, there has been a 56 percent
reduction against subscriber loss to DBS," Winning said.

Jones will continue to run similar ads in the future, even
as the cost of DBS hardware continues to drop.

Cox Communications Inc. is running four syndicated TV spots
that satire DBS, featuring a DBS salesman in what appears to be a Senate hearing. One of
the spots focuses on the cost of additional receivers.

Chris Taylor, Cox's manager of advertising, said the
MSO will continue to promote itself against DBS, although the focus of the ads may change
as the company rolls out its digital television service. Taylor said the tag line for the
Cox digital service is, "Digital Without a Dish."

Today, additional TV outlets are free for Cox's basic
services. The company charges a fee for the converter boxes needed to supply premium or
pay-per-view services. Taylor said the costs compare "very favorably" with DBS.

Many DBS executives predicted that cable companies would
cut down on their anti-DBS ads as DBS continues to overcome consumer objections to their
services. They also suggested that cable companies may face their own problems related to
the cost of multiroom hardware once they roll out their digital cable services.

But Steve Effros, president of CATA (the Cable
Telecommunications Association), said that because digital will be an add-on to basic
cable, consumers would not need digital boxes for every TV in the house unless they wanted
those additional digital tiers everywhere.

By the same token, DBS retailers can try to persuade
customers to settle for off-air broadcast services in additional rooms until they can
afford to buy more satellite receivers. But it's best for all concerned that the
customer knows all options before bringing a single-IRD system home.

"Otherwise, there can be fights" between family
members who want to watch different subscription programming at the same time, said
Charlie Abbott, owner of Las Vegas-based Abbott's Audio/Video.

Single-receiver systems still make up the bulk of
today's DBS homes.

Spreitzer estimated that as many as one-third of Dish
Network's subscribers upgrade to a second IRD.

Casamo said about 15 percent of DirecTv's subscribers
buy an additional receiver when they buy their first IRD, and another 5 percent or 6
percent buy a second receiver sometime later.

Denny Wilkinson, senior vice president of marketing and
programming for PrimeStar Partners L.P., said about 15 percent of PrimeStar subscribers
have two IRDs. Today, PrimeStar customers don't have to buy the equipment, but they
do pay an additional $13 per month to lease a second receiver.

All PrimeStar dishes are installed with a dual-LNB unit,
which makes it easier to upgrade to a second receiver.

Casamo said DirecTv plans to require its manufacturers to
sell only dual-LNB systems in the future. But its leading product supplier, Thomson
Consumer Electronics, said it has no plans to do away with single-LNB systems.

Spreitzer said EchoStar also plans to continue to produce
and market low-cost, single-LNB models.

The price of the second receiver is not the only cost
involved in solving the whole-house problem. Installation costs must be considered, too.
Those costs vary from dealer to dealer.

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